How we can determine the cost basis of stock that we received as a gift?
If you have been assuming that in order to be able to conduct the determination of liability in regard to the gift tax, the value that is associated with a gift of stock is regarded as being gifted shares cost basis, this article will shed more light on the real situation regarding this type of issue. Thus, it is understood from this vantage point that when someone is given a gift of stock, there is the placement of a different value for the sake of gift purposes as well as income tax purposes. Liability for gift tax is founded on what is regarded as being fair market value in terms of the date when the gift is actually received. Liability in terms of income tax, which is set forth at the time when the receiver decides to sell the stock, is founded on both the holding period of the stock as well as the cost basis of the designated shares of the stock.
A lot of issues can arise
It cannot be denied that gifts of stock can cause the rising of many issues pertaining to taxation. This is due to the fact that there are a variety of methods for determining the value of the stock based on if the stock is for the sake of income tax or for gift purposes.
The possibility of possessing a liability for gift tax is applied only to the one who donates more than a designated cap off-limit, such as fifteen thousand dollars or more in the year 2020 to an individual in the span of a year.
Calculating the cost basis on gifted stock
The one who received the gift is not required to pay a tax on the gift. However, when the person moves forward with selling the stock, there is the requirement to derive the calculation of a value of the stock for the sake of income tax.
The cost basis of the stock that the person received as a gift (“gifted stock”) is determined by the giver’s original cost basis and the fair market value (FMV) of the stock at the time he or she received the gift.
There are 3 solutions :
1) If fair market value (FMV) is more than the original cost basis, a person should use the original cost basis during the selling process.
2) If fair market value (FMV) is less than the original cost basis, a person sold the stock for more than the original basis should use the original cost basis in the calculation.
3) If fair market value (FMV) is less than the original cost basis, a person sold the stock for more than the original basis but less than the fair market value at the time of the gift, than selling price will become a cost basis.
Determining the value of the stock for the sake of gift tax
The tax basis of gifted stock: The value pertaining to a gift of stock for the sake of liability in regard to gift tax is not considered as being the cost basis of the donor. Instead, the value in regard to a gift of stock in light of the issue of liability for gift tax is considered to be the market value of the stock when the gift is provided to the recipient. Take into consideration for example, that you bought one hundred shares of a particular type of stock at a rate of fifty dollars for each share. The cost basis then is noted as being five thousand dollars. At the present time, the stock is now eighty dollars per share and you decide to give the stock as a gift to someone. Thus, for the sake of gift tax, it is noted that the determined value concerning your gift is eight thousand dollars.
For the year of 2020, it was possible for someone to contribute as much as fifteen thousand dollars to a limitless number of people per year while there was no need to report such gifts or to pay a tax on those gifts. If there was the giving of more than fifteen thousand dollars to any particular person, then the scene changed. It was necessary to include a report of the gift when filing taxes. However, there was no need to make any payment of taxes until there is the giving away in excess of eleven million four hundred thousand dollars, which is the present limit for a lifetime–in regard to the amount of mentioned in the sample as well over the amount of fifteen thousand dollars each year for each person.
Thus, in regard to the example, there is no liability for gift tax. But in such cases that the stock was worth two hundred dollars per share, then the determined value of the gift would be designated as twenty thousand dollars. This would make it necessary to conduct a report for this amount, which means that five thousand dollars would undergo application in relation to the lifetime exemption of eleven million four hundred thousand dollars.
Determining the value of the stock for the sake of income tax
The person who receives the gift is not responsible for any gift taxes at the time of receiving the gift of stock. On the other side of the spectrum, it is noted that in such an instance if the person makes the choice of selling the stock, then there is the issue of determining the valuation of the stock for the sake of income taxes. It is at this point that complexities can develop.
It is a typical setting that when it comes to the matter of determining the value in regard to a gift of stock for the sake of liability linked to capital gains tax, the cost basis of the donor as well as the holding period are applied. Take into consideration for example, that your grandfather provides you with a gift of stock. He purchased the stock at a rate of ten dollars for each share. At the time that you receive the gift of stock, it has a value of fifteen-dollar for each share. If you decide to move forward with selling the stock, no matter if there is the deriving of a loss or a gain, your cost basis will be regarded as being equivalent to that of the cost basis of your grandfather at a rate of ten dollars for each share. If you sell the stock at a rate of twenty-five dollars for each share, then you will be required to pay tax based on either the short term rate or the long term rate, which takes into consideration the length of time that the stock had been owned by your grandfather. This will be applied to a gain of fifteen dollars per share. If you conduct the selling of the stock at eight dollars per share, then it is determined that two dollars will be your capital loss for each share.